PRESIDENT Bush looks set to direct billions from the financial- rescue fund to GM and Chrysler. He seems to have been hustled by the bailout advocates’ attempt to shift attention away from the massive subsidy to Big Three investors (including us) they propose and toward the alleged “Main Street” consequences – such as the nightmare claim that if the Big Three go down, so will their suppliers, triggering massive domino effects and (in the wildest claims) as many as 3 million jobs lost.
To the contrary, the experiences of the auto suppliers, so many of which already have been forced into Chapter 11, are the best argument for letting the Big Three have their own bankruptcies sooner rather than later.
Over the past couple of decades, the suppliers – actually systems makers – have taken over most manufacturing of American cars. The “hollowed out” Big Three now have not much more to do with making cars than Dell has to do with making PCs (which of course are really made by Intel and Microsoft).
In that sense, the Big Three have already been through bankruptcy once – except that they outsourced their bankruptcies over the last 20 years to their suppliers, along with their design and manufacturing.
Not all those bankruptcies have gone brilliantly. But the auto industry didn’t stop, or even pause because of them, and on balance most of the suppliers are better off.
If the Big Three had been directly exposed to the tough love of Chapter 11 years ago, there might have been less net disruption to the industry. Some of the better suppliers might not have been forced to the wall by the Big Three’s inefficiencies. (Not for nothing are the best suppliers now focused on recruiting Japanese-American automakers as customers.)
What’s already happened to the suppliers refutes the most lurid nightmare conjured up by the bailout crowd – the notion that, in bankruptcy, the Big Three would be brutally liquidated, their business operations terminated and their assets sold off for pennies on the dollar to scavengers with no interest in making cars in America.
Nonsense. Bankruptcies are essentially negotiations among claimholders, supervised by a judge. To get to a “fire sale” liquidation, most of the most powerful claimholders must first want to get there, and then the judge must agree to enforce this outcome against claimholders who oppose it.
Which Big Three claimholders want a fire sale? The unions? Management? Do bondholders want Big Three assets sold for scrap at pennies when those assets could sell for 50 cents on the dollar to reorganized reincarnations of the Big Three?
Yes, bondholders want a bailout – but not because bankruptcy would likely produce a fire sale and suspension of operations. Rather, they fear a Big Three bankruptcy would be so protracted and complex that their claims might be fatally diluted as GM continues to lose money while working toward a reorganization. Those fears are not without foundation. But what’s good for GM bondholders here is not what’s good for America.
The administration’s belief that saving GM from the bankruptcy it so richly deserves is essential to saving the rest of the economy symbolizes how it misunderstood the crisis from the start.
When credit markets seized in mid-September, the government acted as if the problem were the collapsing market price of non-performing loans held by money-center banks. Nonsense. The real problem was the collapsing market price of performing loans held by everyone else.
That is, the true crisis was not that companies that richly deserved to go under couldn’t raise cash at favorable rates, but that otherwise good companies were (and still are) imperiled because they can’t raise money at reasonable rates. The problem today is not that a sensible market doesn’t want GM bonds, but that a panicked market doesn’t want anyone’s bonds.
As long as the government continues to conceive its job as saving bad companies from their just deserts – rather than getting the trillions of dollars of credit destroyed by the panic back out to the productive economy – the bailout will continue to expand and continue to fail.
Andrew Redleaf and Richard Vigilante are, respectively, CEO and communications director of Whitebox Advisors, a family of hedge funds that at any moment may hold long or short positions in the securities of US automakers and other related companies.